Another Revisit to Madoff and His Charity Stakeholders – Has an Upgrade in Compliance Compromised Auditor Independence for Yeshiva University? – Part IV – Installment 25

This is the twenty-fifth in a series of installments on this blog that are discussing issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Defined terms and links not otherwise contained in this Installment are included in Installments 22, 23 and 24. This Installment will continue the Yeshiva/KPMG discussion that was begun in Installment 24, and readers are encouraged to consult the earlier blog posts as a background for this Installment.

This Installment is Part IV of an analysis of recent public financial reporting of Hadassah and Yeshiva. In earlier Installments, I had stated my view that Yeshiva provided significantly greater credibility, disclosure and transparency relative to Madoff and related matters through its Form 990 filings than Hadassah did in its Forms 990. However, Installment 24 introduced the question whether recent moves by Yeshiva to improve its compliance program and processes, including the retention of Alan Kluger as Director of Tax and Compliance at Yeshiva soon after his departure from KPMG, may have compromised the independence of Yeshiva’s auditor KPMG.

An observation was also made at the end of Installment 24 that Yeshiva did not observe the one-year cooling off period for such retentions by public companies as mandated by the Office of the Chief Accountant (the “OCA”) of the SEC. While Yeshiva, as a 501(c)(3) public charity, is not a public company and is not governed by the OCA, Installment 24 ended by asking whether the audit or other appropriate board committee or the Board of Trustees of Yeshiva sufficiently considered the question of auditor independence in the circumstances of the hiring of Mr. Kluger.

The importance of Yeshiva’s utilizing best practices in avoiding even a question as to auditor independence is highlighted by Footnote 17 to the 2009 Yeshiva Financial Statements. Footnote 17 discloses that in July 2009 the Dormitory Authority of the State of New York (“DASNY”) issued $140,820,000 of Revenue Bonds on behalf of Yeshiva (the “Yeshiva Bonds”).

The minutes of the June 24, 2009 DASNY Board meeting (the “Minutes”) disclose the discussion by the DASNY Board of the authorization of the Yeshiva Bonds. The Yeshiva Minutes evidence the deep concerns of the DASNY Board relative to the quality of the Yeshiva financial statements and other financial events surrounding Yeshiva.

Specifically mentioned in the Minutes was the downgrade of the Yeshiva credit rating by Moody’s and a potential further downgrade by Moody’s. Additionally, the Secretary of the Board, Jacques Jiha, noted that he found it surprising that Yeshiva “did not have an investment officer in place in light of what has happened.” Presumably Mr. Jiha was referring to the decline in the endowment funds of Yeshiva, a substantial portion of which was directly attributable to losses from investments made with Madoff through Ezra Merkin, both of whom were formerly Trustees of Yeshiva.

As an aside, the description of Mr. Kluger’s position at Yeshiva cited in Installment 24 calls for him to consult with the Yeshiva Chief Investment Officer.

Most significantly, however, was the following extract from the Minutes:

[Board Member] Mr. [Anthony B.] Martino explained that the question is whether the [Yeshiva] University’s cash forecast included what was needed for calls on investments. Mr. Martino asked about the status of the University’s audited financial statements. Mr. [David L.] Kvam [Director, Financing Coordination of DASNY] responded that the June 30, 2008 statements had been issued, albeit late.

Mr. Martino asked for confirmation that the University was given an unqualified opinion. Mr. Kvam responded in the affirmative.

Just prior to the close of the Yeshiva fiscal year ending June 30, 2009, in which the Yeshiva Bonds were authorized, and to which the Yeshiva 2009 Financial Statements related, the DASNY Board demonstrated concern about the integrity of the financial statements of Yeshiva. The DASNY Minutes also reflect that two representatives of KPMG were in attendance at the DASNY Board meeting, presumably relating to Yeshiva. It would appear that none of the other institutions addressed at the DASNY meeting utilized KPMG as its auditor.

It is clear from the foregoing discussion that Yeshiva and KPMG were well aware of the concerns and scrutiny to which the financial activities of Yeshiva were being subjected during 2009. To ensure continued auditor independence, they each should have utilized “best practices” in evaluating and authorizing the relatively fast track transitioning of Mr. Kluger from Tax Managing Director of KPMG to Director of Tax and Compliance at Yeshiva.